All You Need to Know About US Taxes Before You Start Freelancing

As the internet became prevalent and began to be part of our lives, freelancing found a special spot in the digital environment. By definition, freelancing is doing specific pieces of work for different organizations or clients, rather than being employed in a single organization. In other words, freelancers are self-employed and independent contractors working for multiple companies. Their level of commitment to companies and compensation are not the same as full-time employees because they usually work on a part-time or short-term basis.

Countless individuals shifted from regular office work to freelancing. While others are excited to exercise the freedom of being their own boss, some may have faced the dilemma of joining the virtual community. Most freelancers opted for this job because they can showcase their abilities, develop creativity, and enjoy their craft and passion.

According to  Upwork and Freelancers Union, about 53% of workers aged 18-22 have been freelancing since 2019. In the same year, an estimated 57 million Americans are freelancers. Other terms of freelancer include contract worker, independent contractor, remote worker, and 1099 contractor. Just like any other worker, an independent contractor needs to pay the income tax. This is what the US government calls 1099 contractors. What are the important things that independent workers should keep in mind regarding taxes before accepting jobs?

Filing and Paying for Self-Employment Tax

Freelancers are independent contractors or self-employed. In 2020, they are required to pay a self-employment tax of 15.3%. This consists of Social Security and Medicare taxes, which is 12.4% and 2.9% respectively. It is similar to the taxes withheld from the paychecks of most regular wage earners. The amount should include the employer’s share of those taxes. However, since you are an independent contractor, you are considered both employer and an employee. Therefore, you need to account for those on your own. Generally, your net earnings as a self-employed individual are subject to self-employment tax. This rule applies to everyone, regardless of age, including those who are receiving both Social Security and Medicare. FlyFin helps you find new deductions

Taxes are not Withheld from Your Paychecks

As previously mentioned, as a freelancer, you are not just the employee but the employer as well. Your client or the company that you work with do not withhold taxes from your earnings. For tax purposes, you work for yourself and are not considered an employee. So, don’t be surprised if you don’t get any tax refund for the year. Technically, you still owe the government a huge amount of money. So, for every paycheck that you receive, set aside about 25%-30% for the taxes. This way, you won’t be shocked by the overwhelming tax bill when it’s time to pay up.

You have to Pay Taxes Quarterly

According to the Internal Revenue Service, independent contractors have to pay taxes quarterly since taxes from their earnings are not withheld then the entire year. But what exactly are quarterly taxes? It is also called estimated taxes. These are the taxes that a self-employed individual has to pay to the IRS throughout the year once your income exceeds a specific amount. If you are a business owner, freelancer, or independent contractor who expects to owe at least $1,000 in taxes from your self-employed earnings, then you need to pay your quarterly taxes. If you don’t pay the proper tax, you may have to pay the penalty for underpayment of estimated tax. Generally, no taxpayer would want to pay the penalty. However, the penalty can be waived for these two reasons:

• If underpayment of estimated payments was caused by a disaster, casualty, or unusual incidents
• Retirement or disability during the tax year for which the estimated tax payments were required to be paid or in the preceding tax year, failure of payment was reasonable and not due to willful neglect.

If you happen to overpay the estimated tax, the excess amount will be given back to you in the form of a tax refund.

Take Advantage of Self-Employment Tax Deductions

Your primary goal in filing taxes is to reduce your liability to the lowest possible amount. As a freelancer, the possibility of having more expenses than a typical employee is more likely to happen. You may not be aware that you can take a bunch of tax deductions not commonly allowed to regular employees. If you don’t take advantage of these deductions, that means you’re paying more taxes than you have to.

According to the IRS, freelancers are only allowed to claim deductions on expenses if they are ordinary and necessary for the operation of the business.

The most common deductions include:

• Home Office. The IRS allows home office deduction, and you can write off all expenses from rent to utilities. However, you need to use a portion of your home exclusively for your self-employment work.
• Travel and business meals. You’re also allowed to deduct the cost of work-related travels and business meals. It is deductible at a 50% rate. But you need to provide concrete evidence and documents.
• Office Supplies. Unlike working in a typical office, the employer provides all office supplies and equipment. You can write off these office items if they are needed for you to perform your job.
• Certifications, Training, and Education. If you want to take training and classes to obtain certifications to enhance the skills and knowledge in your field, you may write off the costs. Make sure though that it is work and business-related.

Work with A Tax Professional

If you are self-employed, it is recommended that you work with an accountant who specializes in freelancers and small business owners. Hiring a good accountant may be expensive but it is an investment that can save you from any risk and stress. It is essential that you know and understands tax law, and how tax returns work.

Freelancing is a great opportunity to take control of your life while utilizing your talents, skills, and passion. The life of a freelancer can be both profitable and fulfilling if you have the right attitude, motivation, and determination.